Crypto Explained: Beginner’s Guide to Bitcoin, Ether and Dogecoin in Very Simple, Easy to Understand Terms

Last Updated on July 11, 2021

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Trying to understand crypto but don’t know where to start? Don’t panic. We’ve got you covered.

A century ago, most of the world’s circulating paper money was tied to precious metals. Paper money, also known as bank notes, were certificates that had a underlying value defined by a certain specified amount of silver or gold. But gradually, in a complicated process that came to a head as recently as the early 1970s, this tie was broken. Governments no longer convert notes into gold.

Governments issue the money, or they charter the central banks that do and, of course, the money is accepted back by these governments as payment of taxes, fees, and penalties. But the money issued by government continues to be valuable because it is useful for everyone to regard it as valuable.

Crypto as a Reaction to Fiat Money

Can’t people create their own form of exchange to fulfill their particular needs? Many people have criticized the institution of what they call “fiat money.” They have longed for some more natural money. Some of this longing  has taken the form of a nostalgia for the old role of the precious metals.

But sometimes, the desire for a money that holds a certain value for a reason other than government say-so takes a forward-looking form. When this happens, we get cryptocurrencies: moneys that derive their value from being “mined” by computers that can solve difficult mathematical problems, that are then used as both forms of exchange and stores of value without ever having to take physical form.

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The recent bitcoin selloff worried investors and creating huge ups and downs. Should you buy, sell or wait it out? Photo credit: Shutterstock.com

Crypto Defined, Bitcoin Explained

Cryptocurrencies are digital currencies in which transactions are verified and records are kept without appeal to any centralized authority, in a system grounded in cryptography (the computerized solution to increasingly difficult math puzzles.

The first cryptocurrency in this sense, and the most firmly established in the contemporary financial world, was and is bitcoin (BTC). It was created in 2009, by someone calling himself Sartoshi Nakamoto. Or perhaps by a group of coders collectively calling themselves that. “Satoshi” had an incredibly inventive mind, and the key features of his model remain appealing, which is why they keep inspiring imitators.

As it has gradually become a household name, its value has soared, an idea that has found widespread applications outside of the cryptocurrency world.

Crypto Attractive Because it's Not Tied To Government
Crypto was immediately attractive because it wasn’t tied to government. Photo credit: Shutterstock.com

Also, Satoshi’s bitcoin model introduced the idea that mining the coins should become progressively more difficult, and in time impossible, so that there is a hard limit to the number of bitcoins that can ever exist. Likewise, there is a hard limit to the amount of gold that can ever be pulled out of the Earth. Back when everybody was a beginner in the field, Satoshi was deliberately creating a parallel between one of the more attractive (anti-inflation) features of the old-fashioned precious metals and the forward-looking world of cryptos.

Ether Hitches a Ride on Ethereum

Beyond bitcoin? The next crypto that belongs on any short list is Ether (ETH), created by Vitalik Buterin in 2013, and crowd-funded into existence the following year. Ether’s blockchain is called the Ethereum, and in a sense Ether is riding along on Ethereum’s coattails. Program developers love Ethereum because it allows them to build “smart” self-executing contracts, and it has served as a foundation for the recent boom in non-fungible tokens (NFTs).

Thirdly, we should say a word about a couple of cryptos that vary in important ways from Satoshi’s model. There is Tether (USDT). It has that name because it is “tethered” to a fiat currency, typically the U.S. dollar, but the yen and the euro too are employed for backing Tether. It is favored by those investors who worry that the other cryptos have wild swings in value.

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Too risky? Investors are trying to figure out whether they should invest in Dogecoin this summer – and, if so, how much. Photo credit: Shutterstock.com

An Infinite Supply of Dogecoin

Fourth, and finally for our brief list, there is the Dogecoin (DOGE). This is a cryptocurrency without the limits on mining. There could in principle be any imaginable number of Dogecoins in the world, and then twice or three times that. You might ask: “then what is the point?” Actually, the original point back in 2013 was a joke, a play on the proliferation of other crypto coins. Yet the joke has become a serious matter: one with a market cap of over $44 billion.

Wise investors will not put money, beyond joke-sized amounts, into DOGE. This is so despite, or perhaps because of, the fact that celebrities like Elon Musk have shilled for it. The other cryptos, though, are not so scary. They might well prove a valuable part of your overall investment portfolio.